Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Greek tragedy: Telecom focus of bloody PE fight

David Bonderman, founding partner of TPG Capital
Andrew Harrer | Bloomberg | Getty Images

A hedge fund and other out-of-luck bond investors have won a $565 million judgment in a long-running legal saga that accuses large private equity firms of unfairly profiting from a Greek telecom company they set up to fail with piles of debt.

Despite the favorable court ruling filed Tuesday, London-based SPQR Capital and other bondholders of the company still face legal challenges to get PE giants TPG Capital Management and Apax Partners to pay.

At issue are bonds issued by Hellas Telecommunications in 2006 when it was a major Greek mobile phone operator.

TPG and Apax bought the company, then called TIM Hellas, in 2005 for 1.36 billion euros.

Hellas took on much higher levels of debt during the reign of TPG and Apax, a large portion of which was used to pay the firms back on their initial investment. Hellas was then sold in 2007 to Italian telecom investment company Weather Investments for 3.4 billion euros.

The company collapsed in 2009 following the financial crisis, leaving some bondholders like SPQR with 100 percent losses. U.K. liquidators for Hellas later called the situation "one of the very worst abuses of the private equity industry."

The PE firms have countered by noting the company's bonds soured several years later and under new ownership and happened on the heels of the financial crisis. Plus, defenders say, bondholders like SPQR were sophisticated buyers who should have understood the risks.

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SPQR, which owns about 25 percent of one of the major bond types, has been suing to get its money back in U.S. courts. SPQR is using an entity called Cortlandt Street Recovery Corp. to go after TPG, Apax and related entities in coordination with Wilmington Trust Company, a trustee for other bondholders. The crux of their claim is that the bonds were sold based on collateral that wasn't really there but instead was taken by TPG and Apax.

Jared Stamell, an attorney with Stamell & Schager, which represents SPQR, said he was happy with the judgment.

"We welcome the challenge of recovering monies on behalf of investors who were misled by the private equity firms into lending them money," Stamell said in an email.

The trick is actually getting the cash.

The judgment in New York State Supreme Court is against the actual bond issuers, Hellas Telecommunications Finance and Hellas Finance, and not the PE firms themselves. Lawyers for the bondholders have to search for assets of those Hellas units; to get money from TPG or Apax, they will have to show that the private equity outfits were in control of the units and benefited from them, according to Stamell.

"We are going to target the entities and individuals that received the loan proceeds which are Apax, TPG and their funds," Stamell said. He said litigation was coming but he wasn't sure when it would be filed.

If getting money from TPG and Apax doesn't work, SPQR's lawyers said they will ultimately target individuals and entities who took profit from the bonds, like TPG co-founder David Bonderman (named in a previous complaint) or TPG or Apax clients like the California Public Employees' Retirement System, which was invested in a TPG private equity fund.

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Todd Fogarty, an Apax spokesman, said the PE firm has already been exonerated based on the recent dismissal of a separate lawsuit from SPQR and Wilmington that directly targeted TPG and Apax.

"In the Sept. 14 order in which the court granted summary judgment against the Hellas entities that issued and guaranteed the defaulted PIK (payment in kind) Notes, the court also dismissed all claims against Apax and TPG. The dismissal of those claims speaks for itself," Fogarty said. "Apax and TPG, which sold their entire interest in the Hellas group approximately three years before the default on the PIK Notes, are not responsible for the judgment against the Hellas entities."

A TPG spokesman, Owen Blicksilver, declined to comment. TPG said in March that a similar suit brought by the U.K. liquidators was "completely without merit." A spokesman for CalPERS said that TPG could speak on its behalf.

SPQR, led by CEO Bertrand des Pallières, will continue its case regardless.

"We find it remarkable that eight years after Apax and TPG took 1.5 billion euros of money that didn't belong to them, leaving a hole in the accounts of a previously healthy company, these firms continue to defend the indefensible," Stamell said.